Before considering whether the FHSA is suitable for U.S. citizens living in Canada, it’s important to understand how it works. We suggest you read our article FHSA at a glance!
First aspect: tax treatment in the USA:
The U.S. tax authorities do not recognize the preferential tax treatments specific to U.S. taxation, with a few exceptions. RRSPs are an exception, as the U.S. tax authorities allow income accumulated in an RRSP to be taxed only on withdrawal. Apart from this exception, the general rule is that accounts with preferential tax treatment are not recognized in the U.S. (TFSAs, RESPs, etc.).
FHSA has not been the subject of any specific determination by the US Internal Revenue Service. The FHSA therefore has no special status in the USA and will probably be considered as a regular investment without any tax advantages. Until the IRS issues an official position, all lines in this article are unofficial assumptions.
This means that FHSA contributions are unlikely to be deductible from U.S. taxable income. The income generated will be taxable as it is earned. .
Strategies to avoid tax in USA on FHSAs
At first glance, if the tax advantages are useful in Canada but you’re paying the price in the U.S., it seems disadvantageous. Several strategies that can be used to offset U.S. taxes and retain most of the benefits that the FHSA gives you in Canada.
Strategies include the use of deferred foreign tax credits, the foreign earned income exclusion combined with the standard deduction, maximum deferral of capital gains realization, and many others. These strategies may or may not apply to you. The analysis must be made on an individual basis, given the infinitesimal number of possible combinations.
In short, it is possible that the use of strategies could make the FHSA advantageous for a U.S. citizen residing in Canada, but you need to consult your tax advisor, as this will depend on your specific situation. There’s nothing easy about cross-border taxation!
Second aspect: requirements for foreign trusts:
Assuming the FHSA is classified as a foreign trust for U.S. tax purposes, requirements such as annual filing of Form 3520 may be necessary.
This obligation to disclose information on Form 3520 and potentially Form 3520A are separate from the obligation to report earned amounts on the U.S. income tax return. You can find out more about forms 3520 and 3520A by reading our article on the subject.
Third aspect: obligation to disclose foreign assets:
FHSA accounts must be disclosed on the Foreign Assets Declaration Form (commonly known as the FBAR). The FBAR must be filed if the total of all accounts outside the USA exceeds, at any time during the year, $10,000 USD. See our full article on FBAR here.
Finally, depending on your situation, you’ll have another financial asset disclosure form to complete, Form 8938. This form is similar to the FBAR, but the filing thresholds are higher. Read more in our article on 8938 here!
Conclusion
In conclusion, the FHSA is a formidable tool for Canadian purposes, but can have considerable impact in the USA. It’s imperative to prepare your strategy well before opening a FHSA, as it’s possible that the advantages on the Canadian side will be outweighed by the disadvantages on the U.S. side. In some cases, with good planning, you can take advantage of the FHSA with (almost) no impact on the U.S. side.
Disclaimer:
These accounts are still relatively new. Americans considering opening such accounts should be aware of the potential risks associated with accounts that have not yet been reviewed or challenged by the IRS. If you are an American living in Canada, be sure to seek advice from your tax manager at Effisca Tax before opening a FHSA.